How Indian companies are misusing public trusts to launder their CSR spending

NEW DELHI: The statutory corporate social responsibility (CSR) norms introduced two years ago were expected to revolutionise funding of social causes, but some sections of India Inc may now be abusing these for laundering of black money, according to sources privy to such transactions.

Some companies are using onhire charitable trusts to fabricate CSR spending, at least two sources who have helped craft and execute such transactions said. They spoke to ET on the condition of anonymity.

India is the first and only country to have statutorily mandated corporate social responsibility for certain class of companies but the law allows a lot of leeway. CSR spends disclosed by companies need not be vetted by statutory auditors unlike other spending. Moreover, financials of charitable trusts also come under little statutory scrutiny. This combination of factors has left the new CSR norms wide open for abuse.

"Such abuse in unlikely in trusts floated by companies themselves. But it is possible where they use external trusts," says Rusen Kumar, founder director of IndiaCSR, a portal that collates information and developments on CSR from across the country.

According to one person, the modus operandi is simple. If a company is obligated to spend, say, Rs 10 crore on CSR, it writes out a cheque in favour of a trust that works in education, healthcare, environment protection or any of the activities specified by the government. The trust, after deducting its commission, discreetly returns the money in cash to the officials or promoters, instantly turning Rs 10 crore of white money into black. The middleman gets a cut as well.

"Often the promoter pockets the money," says a chartered accountant who has also helped clients with such deals. Often set up by politicians or rich individuals, these trusts also serve as laundering mechanism for unaccounted money. For example, a politician would set up a trust to build an educational institution. CSR funds would flow into the trust through legitimate banking channels. These funds are returned to the promoters in cash and the actual expenditure on the institution is met with the politician’s illicit hoard. The expenditure is then inflated helping launder the black money.

At the end of the year, the trust gives a report to the company which it duly incorporates in its CSR reporting form called AOC-4. "Though the financials are part of the directors’ report which is audited by external auditors, the AOC-4 itself is not subject to external audit. It is a lacuna," says Bhaskar Chatterjee, director general and CEO, Indian Institute of Corporate Affairs (IICA).

ET met a middleman who had just concluded two deals—one for a well-known listed company and another for a smaller firm. He said he had already done cash-back deals worth about Rs 40 crore this year.

This is the first year that the CSR norms have come into play. Rules under Section 135 of the Companies Act, 2013, mandate that any company with a net worth of over Rs 500 crore or annual revenue of Rs 1,000 crore or net profit of Rs 5 crore has to spend 2 per cent of the average profit of the previous three years on CSR activities.

Public trusts are a favoured route to launder money because they are not adequately governed or monitored. Though some states such as Maharashtra have their own law such as the Bombay Public Trusts Act, 1950, trusts are not governed by a nationwide law. If a state law doesn’t exist such as in Delhi, these trusts are governed by the Indian Trusts Act of 1882 that applies to private trusts. There is no centralized repository— like the registrar of companies for corporates—of information on public trusts.

They file annual accounts with the charity commissioner in states where it exists. Elsewhere, like Delhi, the only annual filing is income tax returns. An income tax official told ET that unless there is specific information, these are rarely scrutinized. In short, operations of public trusts remain opaque IICA’s Chatterjee, who was instrumental in drafting the CSR law, says that there is no real system to track these trusts. "The law should be tightened to ensure that money reaches the people it is intended to. If there is any leakage it should be plugged."

Finance minister Arun Jaitley recently wrote in a Facebook post that bulk of the black money is within the country. He is probably right, but it would take tremendous political will and legislative imagination to choke the black money pipelines.